Australia Transfer Pricing Overview

Posted 28/9/2018 by Aaron Lesley

Australia has a reputation for having one of the toughest transfer pricing enforcement regimes in the world. As a consequence, several leading international transfer pricing experts call Australia ‘home’, such has been the opportunity to work on significant transfer pricing disputes that have captured the attention of global practitioners and Tax Authorities alike.

Over recent years, Australia’s transfer pricing landscape has changed significantly. On the back of two very high profile transfer pricing court cases, Australia’s transfer pricing legislation was completely re-written.

In both cases, the Commissioner of Taxation (“CoT”) was unsuccessful in applying profit-based methods for the purpose of determining arm’s length consideration for intra-group transactions. Rather, the Administrative Appeals Tribunal (“AAT”) and the Federal Court of Australia, respectively, preferring transaction-based methods. In addition, the Federal Court of Australia in SNF Australia, cast doubt on the ability of the Commissioner and taxpayers to rely upon the Organisation for Economic Cooperation and Development’s Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (“The OECD Guidelines”).

Australia’s transfer pricing laws were comprehensively rewritten in 2013, with a new self-assessment based regime taking effect for income years beginning on, or after, 29 June 2013. The new rules continue to be based upon the arm’s-length principle. The law contains specific provisions that require transactions to be disregarded and ‘reconstructed’ in accordance with hypothetical arm’s-length transactions in certain circumstances.

The law prescribes the 2010 OECD Guidelines as relevant guidance materials that must be considered by taxpayers when self-assessing whether they have complied with the rules. Transfer pricing documentation is not mandatory, but it is a necessary prerequisite for establishing a ‘reasonably arguable position’ (“RAP”) on any TP matter. Establishing a RAP reduces the penalty rates that may apply if the CoT issues an amended assessment.

The Australian Taxation Office (“ATO”) actively enforces Australia’s TP rules through reviews and audits. The ATO is increasingly focusing on adopting a ‘whole of code’ approach when considering TP matters, rather than considering TP in isolation, particularly in light of the global focus on base erosion and profit shifting (“BEPS”). This means that TP issues are often examined in combination with related-international tax issues.

The new transfer pricing self-assessment regime is placing greater burden on the Public Officer to sign the income tax return to confirm that the related party pricing is arm’s length and is supported by good quality transfer pricing documentation. Failure to have adequate transfer pricing documentation can result in higher tax penalties in the event on an ATO audit.

 

[1] Roche Products Limited v Federal Commissioner of Taxation [2008] AATA 639; (2008) 70 ATR 703 and Federal Commissioner of Taxation v SNF (Australia) Pty Ltd (2011) 193 FCR 149

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